SEC Rule 10b5-1: Insider Trading Arrangements and Related Disclosure

What is SEC Rule 10b5-1?

SEC Rule 10b5-1 is a regulation that provides a framework for insiders of public companies to establish predefined trading plans for selling their stock while minimizing the risk of insider trading accusations. Adopted under the Securities Exchange Act of 1934, this rule allows corporate executives and other insiders to set specific conditions — such as prices, amounts and sale dates — before executing trades. Ultimately, these conditions help ensure these transactions are conducted without access to material nonpublic information (MNPI).

Amendments, effective December 14, 2022, introduced new conditions including:

• Mandatory cooling-off periods for directors and officers
• Installing strict good faith representations
• Enhancing disclosure requirements

Through these conditions, the SEC aims to further safeguard against insider trading practices, thereby reinforcing the intent of Rule 10b-5, the fundamental provision against securities fraud.

Who does SEC Rule 10b5-1 apply to?

SEC Rule 10b5-1 affects a range of parties, including domestic companies and foreign private issuers that file periodic reports and proxy statements under the Exchange Act. It specifically impacts those who seek to utilize the Rule's affirmative defense. This includes directors, officers, and major shareholders — individuals or entities owning more than 10% of the company's voting shares — who are subject to reporting requirements under Section 16.

Key requirements of SEC Rule 10b5-1

SEC Rule 10b5-1 establishes a framework for creating trading plans that provide an affirmative defense against insider trading liability. To be compliant, a Rule 10b5-1 plan must meet the following key requirements:

• Specification of price and amount: The plan must clearly state the price and amount of securities to be traded, including specific dates for these transactions.
• Formula for determination: A defined formula or method must be provided to determine the amount, price, and date of trades.
• Broker discretion: The plan should grant a broker the exclusive authority to execute trades, ensuring that no material nonpublic information (MNPI) is used during the process.

For a more in-depth look into SEC Rule 10b5-1, including information on cooling off periods, certification requirements, limitations on plans, and new disclosure requirements, see the SEC’s fact sheet here.

What are the penalties for violating SEC Rule 10b5-1?

The penalties for violating SEC Rule 10b5-1 can be severe as it would be a securities fraud crime. Consequences may include:

Criminal penalties:

• Felony conviction, which can lead to up to 25 years of imprisonment
• Possible civil fines in addition to restitution owed to victims

Civil penalties:

• The SEC can initiate lawsuits against violators, which may result in significant financial repercussions

Private litigation:

• Injured investors can also file lawsuits if they have standing, leading to additional financial liabilities for the defendant

What Smarsh is doing

Smarsh has been active and leading the charge in communications compliance for over two decades. We’re keeping a vigilant eye on evolving regulations and compliance requirements to keep our products adaptive and agile. With Smarsh, our customers have one less big-ticket item to worry about when addressing their compliance needs.

Detecting insider trading is a big task — one our customers can shrink using the AI-powered supervision and surveillance of Enterprise Conduct, allowing them to zero in on risk and empower their compliance teams to step in and stop violations before they happen.

Smarsh is here to help your organization future-proof its communications surveillance.